E-commerce 2017 business. technology. society.

E-commerce 2017 business. technology. society.
13th edition Chapter 3 E-commerce Business Models and Concepts

Learning Objectives 2.1 Identify the key components of e-commerce business models. 2.2 Describe the major B2C business models. 2.3 Describe the major B2B business models. 2.4 Understand key business concepts and strategies applicable to e-commerce. Slide 3 is a list of textbook LO numbers and statements.

E-commerce Business Models
Set of planned activities (sometimes referred to as business processes) designed to result in a profit in a marketplace. A firm’s business model is its plan or diagram for how it competes, uses its resources, structures its relationships, interfaces with customers, and creates value to sustain itself on the basis of the profits it generates. Business plan Describes a firm’s business model E-commerce business model a business model that aims to use and leverage the unique qualities of the Internet, the Web, and the mobile platform

Eight Key Elements of a Business Model
There is no standard business model for an industry or for a target market within an industry. However, over time, the most successful business models in an industry predominate. There are always opportunities for business model innovation.

Eight Key Elements of a Business Model
Value proposition Revenue model Market opportunity Competitive environment Competitive advantage Market strategy Organizational development Management team

1. Value Proposition “Why should the customer buy from you?”
defines how a company’s product or service fulfills the needs of customers What value do we deliver to the customer? Which customer needs are we satisfying? What are we offering to each customer segment? Successful e-commerce value propositions: Personalization/customization Reduction of product search, price discovery costs Facilitation of transactions by managing product delivery

1. Value Proposition Value propositions exist in quantitative and qualitative areas Quantitative : Price Cost reduction Risk reduction Convenience Usability Qualitative Newness Performance Design Brand Customization

1. Value Proposition Qualitative Newness Performance Design Brand
Customization

1. Value Proposition http://www.zara.com/om/en/kids-c390010.html
Qualitative Newness Performance Design Brand Customization

1. Value Proposition

1. Value Proposition- APPLE
Qualitative Newness Performance Design Brand Customization

1. Value Proposition

2. Revenue Model “How will you earn money?”
Major types of revenue models: Advertising revenue model Subscription revenue model Freemium strategy Transaction fee revenue model Sales revenue model Affiliate revenue model

2. Revenue Model - Advertising
a company provides a forum for advertisements and receives fees from advertisers (yahoo.com)

2. Revenue Model - Subscription
a company offers its users content or services and charges a subscription fee for access to some or all of its offerings (Pandora.com)

2. Revenue Model - freemium strategy
companies give away a certain level of product or services for free, but then charge a subscription fee for premium levels of the product or service (Pandora.com)

2. Revenue Model - transaction fee
a company receives a fee for enabling or executing a transaction (eBay.com)

2. Revenue Model - sales revenue
a company derives revenue by selling goods, information, or services (amazon.com)

2. Revenue Model - affiliate
a company steers business to an affiliate and receives a referral fee or percentage of the revenue from any resulting sales (skyscanner)

2. Revenue Model - Streams

Insight on Society: Foursquare: Check Your Privacy at the Door
Class discussion: What revenue model does Foursquare use? What other revenue models might be appropriate? Are privacy concerns the only shortcoming of location-based mobile services? Should business firms be allowed to call cell phones with advertising messages based on location?

3. Market Opportunity “What marketspace do you intend to serve and what is its size?” Marketspace: Area of actual or potential commercial value in which company intends to operate Realistic market opportunity: Defined by revenue potential in each market niche in which company hopes to compete Market opportunity typically divided into smaller niches

3. Market Opportunity - Customer Segments
Defines the different groups of people or organizations to serve Separate segments if: Needs require and justify distinct offer Reached through different channels Require different types of relationships Are willing to pay for different aspects Have different profitabilities

3. Market Opportunity - Customer Segments
Customer segments may exist in different types Mass market One large group comprising only one segment Niche market Specific, specialized customer group Segmented Slightly different customer groups Diversified Multiple unrelated customer segments

3. Market Opportunity - Channels
Describes how a company communicates with and reaches its customer segments to deliver a value proposition Raising awareness of the products and services Helping customers evaluate the value proposition Allowing customers to purchase Delivering a value proposition Providing post-purchase customer support

3. Market Opportunity - Channels
Channels demand consideration of key questions Through which channels do our customer segments want to be reached? How can we integrate our channels? What measures define which channels work best?

3. Market Opportunity - Channels - Google

3. Market Opportunity - Customer Relationships
Describes the types of relationships a company establishes with specific customer segments Driven by motivations to include: Customer acquisition Customer retention Upselling

3. Market Opportunity - Customer Relationships

4. Competitive Environment
“Who else occupies your intended marketspace?” Other companies selling similar products in the same marketspace Includes both direct and indirect competitors Influenced by: Number and size of active competitors Each competitor’s market share Competitors’ profitability Competitors’ pricing

4. Competitive Environment - Competitor Analysis
What is a Competitor Analysis? A competitor analysis is a detailed analysis of a firm’s competition. It helps a firm understand the positions of its major competitors and the opportunities that are available. A competitive analysis grid is a tool for organizing the information a firm collects about its competitors. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

4. Competitive Environment - Identifying Competitors
Types of Competitors New Ventures Face Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

4. Competitive Environment Porter’s Competitive Forces Model (1 of 3)
Why do some firms become leaders in their industry? Michael Porter’s competitive forces model Provides general view of firm, its competitors, and environment Five competitive forces shape fate of firm: Traditional competitors New market entrants Substitute products and services Customers Suppliers Porter’s competitive forces model is intended to explain why some firms do better than others. Do students believe that this model captures this idea effectively? Which factor is most important to a firm’s success? You can make a list of five well-known firms on the blackboard or screen and ask students, for each firm, which do they think are the most important competitive forces.

4. Competitive Environment Porter’s Competitive Forces Model
Figure 3.8, Page 96. In Porter’s competitive forces model, the strategic position of the firm and its strategies are determined not only by competition with its traditional direct competitors but also by four other forces in the industry’s environment: new market entrants, substitute products, customers, and suppliers. Notice that in the graphic, competitors are represented differently than the other four competitive forces influencing a firm. Why do students think this is the case? One answer might be that competitors are firms in the same industry and are under similar pressures as other firms in the industry.

Traditional competitors All firms share market space with competitors who are continuously devising new products, services, efficiencies, and switching costs New market entrants Some industries have high barriers to entry, for example, computer chip business New companies have new equipment, younger workers, but little brand recognition Ask students to name different industries and describe the benefits and drawbacks of being a new market entrant in each industry.

Substitute products and services Substitutes customers might use if your prices become too high, for example, iTunes substitutes for CDs Customers Can customers easily switch to competitor's products? Can they force businesses to compete on price alone in transparent marketplace? Suppliers Market power of suppliers when firm cannot raise prices as fast as suppliers Ask students to name different businesses and describe whether or not customers have great control over the business or vice versa, or whether substitute products are a large or insignificant threat to the success of the business.

4. Competitive Environment Rivalry Among Existing Firms 1 of 3
In most industries, the major determinant of industry profitability is the level of competition among existing firms. Some industries are fiercely competitive, to the point where prices are pushed below the level of costs, and industry-wide losses occur. In other industries, competition is much less intense and price competition is subdued. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Factors that determine the intensity of the rivalry among existing firms in an industry. Number and balance of competitors The more competitors there are, the more likely it is that one or more will try to gain customers by cutting its price. Degree of difference between products The degree to which products differ from one product to another affects industry rivalry. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Factors that determine the intensity of the rivalry among existing firms in an industry (continued) The competition among firms in a slow-growth industry is stronger than among those in fast-growth industries. Growth rate of an industry Firms that have high fixed costs must sell a higher volume of their product to reach the break-even point than firms with low fixed costs. Level of fixed costs Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

4. Competitive Environment Threat of New Entrants 1 of 6
If the firms in an industry are highly profitable, the industry becomes a magnet to new entrants. Unless something is done to stop this, the competition in the industry will increase, and average industry profitability will decline. Firms in an industry try to keep the number of new entrants low by erecting barriers to entry. A barrier to entry is a condition that creates a disincentive for a new firm to enter an industry. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Barriers to Entry Barrier to Entry Explanation Industries that are characterized by large economies of scale are difficult for new firms to enter, unless they are willing to accept a cost disadvantage. Economies of Scale Industries such as the soft drink industry that are characterized by firms with strong brands are difficult to break into without spending heavily on advertising. Product differentiation Capital requirements The need to invest large amounts of money to gain entrance to an industry is another barrier to entry. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Barriers to Entry (continued) Barrier to Entry Explanation Existing firms may have cost advantages not related to size. For example, the existing firms in an industry may have purchased land when it was less expensive than it is today. Cost advantages independent of size Distribution channels are often hard to crack. This is particularly true in crowded markets, such as the convenience store market. Access to distribution channels Government and legal barriers Some industries, such as broadcasting, require the granting of a license by a public authority to compete. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Nontraditional Barriers to Entry It is difficult for start-ups to execute barriers to entry that are expensive, such as economies of scale, because money is usually tight. Start-ups have to rely on nontraditional barriers to entry to discourage new entrants, such as assembling a world-class management team that would be difficult for another company to replicate. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Nontraditional Barriers to Entry Barrier to Entry Explanation If a start-up puts together a world-class management team, it may give potential rivals pause in taking on the start-up in its chosen industry. Strength of management team If a start-up pioneers an industry or a new concept within an industry, the name recognition the start-up establishes may create a barrier to entry. First-mover advantage If the employees of a start-up are motivated by the unique culture of a start-up, and anticipate a large financial reward, this is a combination that cannot be replicated by larger firms. Passion of the management team and employees Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Nontraditional Barriers to Entry (continued) Barrier to Entry Explanation If a start-up is able to construct a unique business model and establish a network of relationships that makes the business model work, this set of advantages creates a barrier to entry. Unique business model Some Internet domain names are so “spot-on” that they give a start-up a meaningful leg up in terms of e-commerce opportunities. Internet domain name If a start-up invents a new approach to an industry and executes it in an exemplary fashion, these factors create a barrier to entry for potential imitators. Inventing a new approach to an industry Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

4. Competitive Environment Bargaining Power of Suppliers 1 of 3
Suppliers can suppress the profitability of the industries to which they sell by raising prices or reducing the quality of the components they provide. If a supplier reduces the quality of the components it supplies, the quality of the finished product will suffer, and the manufacturer will eventually have to lower its price. If the suppliers are powerful relative to the firms in the industry to which they sell, industry profitability can suffer. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Factors that have an impact on the ability of suppliers to exert pressure on buyers When there are only a few suppliers that supply a critical product to a large number of buyers, the supplier has an advantage. Supplier concentration Switching costs are the fixed costs that buyers encounter when switching or changing from one supplier to another. If switching costs are high, a buyer will be less likely to switch suppliers. Switching costs Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Factors that have an impact on the ability of suppliers to exert pressure on buyers (continued) Supplier power is enhanced if there are no attractive substitutes for the product or services the supplier offers. Attractiveness of substitutes Threat of forward integration The power of a supplier is enhanced if there is a credible possibility that the supplier might enter the buyer’s industry. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

4. Competitive Environment Bargaining Power of Buyers 1 of 3
Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality. For example, the automobile industry is dominated by a handful of large companies that buy products from thousands of suppliers in different industries. This allows the automakers to suppress the profitability of the industries from which they buy by demanding price reductions. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Factors that have an impact on the ability of suppliers to exert pressure on buyers If there are only a few large buyers, and they buy from a large number of suppliers, they can pressure the suppliers to lower costs and thus affect the profitability of the industries from which they buy. Buyer group concentration The greater the importance of an item is to a buyer, the more sensitive the buyer will be to the price it pays. Buyer’s costs Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Factors that have an impact on the ability of buyers to exert pressure on suppliers (continued) Degree of standardization of supplier’s products The degree to which a supplier’s product differs from its competitors affects the buyer’s bargaining power. Threat of backward integration The power of buyers is enhanced if there is a credible threat that the buyer might enter the supplier’s industry. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

5. Competitive Advantage
“What special advantages does your firm bring to the marketspace?” Is your product superior to or cheaper to produce than your competitors’? Important concepts: Asymmetries: exists whenever one participant in a market has more resources than other participants. Ex. Apple iTunes First-mover advantage: a competitive market advantage for a firm that results from being the first into a marketplace with a serviceable product or service. Ex. Amazon

5. Competitive Advantage
Complementary resources: resources and assets not directly involved in the production of the product but required for success, such as marketing, management, financial assets, and reputation. Unfair competitive advantage: occurs when one firm develops an advantage based on a factor that other firms cannot purchase. Ex. brands Leverage: when a company uses its competitive advantages to achieve more advantage in surrounding markets Perfect markets: a market in which there are no competitive advantages or asymmetries because all firms have equal access to all the factors of production.

5. Competitive Advantage - Strategies for Dealing with Competitive Forces (1 of 3)
Four generic strategies for dealing with competitive forces, enabled by using IT: Low-cost leadership Product differentiation Focus on market niche Strengthen customer and supplier intimacy Here you can make a list of five well-known firms and then analyze with students the major thrust of their strategy. Walmart is a good example to start with because of its emphasis on low-cost leadership.

Low-cost leadership Produce products and services at a lower price than competitors Example: Walmart’s efficient customer response system Product differentiation Enable new products or services, greatly change customer convenience and experience Example: Google, Nike, Apple Mass customization Do students believe it is possible both to design information systems that focus both on low-cost leadership and product differentiation? Some may say it is with sufficient planning and innovation; perhaps a new product is even cheaper to produce than older ones. Some may say that the investment in innovation required for product differentiation precludes that firm from maintaining low-cost leadership.

Focus on market niche Use information systems to enable a focused strategy on a single market niche; specialize Example: Hilton Hotels’ OnQ system Strengthen customer and supplier intimacy Use information systems to develop strong ties and loyalty with customers and suppliers Increase switching costs Examples: Chrysler, Amazon, Starbucks You could ask students to provide other examples from their own experience of companies that exemplify strong focus on market niche as well as excellent customer and supplier intimacy.

5. Competitive Advantage - The Internet’s Impact on Competitive Advantage
Transformation or threat to some industries Examples: travel agency, printed encyclopedia, media Competitive forces still at work, but rivalry more intense Universal standards allow new rivals, entrants to market New opportunities for building brands and loyal customer bases Do students believe it is easier or harder to gain a competitive advantage via the Internet as opposed to more traditional means? Table 3-5 describes the impact of the Internet on various competitive forces.

6. Market Strategy “How do you plan to promote your products or services to attract your target audience?” Details how a company intends to enter market and attract customers Best business concepts will fail if not properly marketed to potential customers For instance, Twitter, YouTube, and Pinterest have a social network marketing strategy that encourages users to post their content for free, build personal profile pages, contact their friends, and build a community.

7. Organizational Development
“What types of organizational structures within the firm are necessary to carry out the business plan?” Describes how firm will organize work Typically, divided into functional departments As company grows, hiring moves from generalists to specialists

8. Management Team Employees of the company responsible for making the business model work “What kind of backgrounds should the company’s leaders have?” A strong management team: Can make the business model work Can give credibility to outside investors Has market-specific knowledge Has experience in implementing business plans

Eight key elements of a business model and the key questions

Raising Capital Seed capital: Elevator pitch Traditional sources
typically, an entrepreneur’s personal funds derived from savings, credit card advances, home equity loans, or from family and friends. Elevator pitch short two-to-three minute presentation aimed at convincing investors to invest Traditional sources Incubators, typically provide a small amount of funding and also an array of services to start-up companies.

Elements of an Elevator Pitch

Raising Capital Crowdfunding
Angel investors: typically wealthy individuals or a group of individuals who invest their own money in exchange for an equity share in the stock of a business; often are the first outside investors in a start-up Commercial banks, venture capital firms: typically invest funds they manage for other investors; usually later-stage investors Strategic partners Crowdfunding involves using the Internet to enable individuals to collectively contribute money to support a project. Ex. Kickstarter and Indiegogo

Insight on Business: Crowdfunding Takes Off
Class Discussion What types of projects and companies might be able to most successfully use crowdfunding? Are there any negative aspects to crowdfunding? What obstacles are presented in the use of crowdfunding as a method to fund startups?

Categorizing E-commerce Business Models
No one correct way Text categorizes according to: E-commerce sector (e.g., B2B) E-commerce technology (e.g., m-commerce) Similar models appear in different sectors Companies may use multiple business models Ex: eBay: a market creator in the B2C and C2C e-commerce sectors, using both the traditional Internet/Web and mobile platforms E-commerce enablers

B2C Business Models E-tailer Community provider (social network)
Content provider Portal Transaction broker Market creator Service provider

B2C Models: E-tailer Online version of traditional retailer
Revenue model: Sales Variations: Virtual merchant: operate only in the virtual world, without any ties to physical locations. (Ex. Amazon) Bricks-and-clicks: are subsidiaries or divisions of existing physical stores and carry the same products. (Ex. Walmart) Catalog merchant: Online version of direct mail catalog. Manufacturer-direct: Manufacturer uses online channel to sell direct to customer (Ex: Dell) Low barriers to entry

B2C Models: Community Provider
Provide online environment (social network) where people with similar interests can transact, share content, and communicate. Examples: Facebook, LinkedIn, Twitter, Pinterest Revenue models: Typically hybrid, combining advertising, subscriptions, sales, transaction fees, and so on.

B2C Models: Content Provider
Digital content on the Web: News, music, video, text, artwork Ex. Harvard Business Review Revenue models: Use variety of models, including advertising, subscription; sales of digital goods Key to success is typically owning the content Variations: Syndication: distribute content produced by others. Aggregators: collect information from a wide variety of sources and then add value to that information through post-aggregation services. Ex: Shopzilla

Insight on Technology: Will the Connected Car Become the Next Hot Entertainment Vehicle?
Class Discussion What value does the Internet of Things (IoT) have for businesses? What impact might IoT have on the content industry? What issues do “connected” cars raise?

B2C Business Models: Portal
Search plus an integrated package of content and services Revenue models: Advertising, referral fees, transaction fees, subscriptions for premium services Variations: Horizontal/general: define their marketspace to include all users of the Internet. (Ex: Yahoo) Vertical/specialized (vortal): focused around a particular subject matter or market segment. (Ex: sailnet) Search

B2C Models: Transaction Broker
Process online transactions for consumers Processes transactions for consumers that are normally handled in person, by phone, or by mail. Primary value proposition—saving time and money Revenue model: Transaction fees Industries using this model: Financial services Travel services Job placement services

B2C Models: Market Creator
Create digital environment where buyers and sellers can meet and transact Examples: Priceline, eBay (no inventory or production costs). Revenue model: Transaction fees, fees to merchants for access On-demand service companies (sharing economy): platforms that allow people to sell services. Examples: Uber: (founded in 2009) currently operates in over 480 cities in 69 countries around the world. Airbnb: founded in 2008, operates in more than 190 countries and 34,000 cities, lists over 2 million rooms available for rent.

B2C Models: Service Provider
Online services Example: Google—Google Maps, Gmail, and so on Value proposition Valuable, convenient, time-saving, low-cost alternatives to traditional service providers Revenue models: Sales of services, subscription fees, advertising, sales of marketing data

B2B Business Models Net marketplaces Private industrial network
E-distributor E-procurement Exchange Industry consortium Private industrial network

B2B Business Models

B2B Models: E-distributor
Version of retail and wholesale store, MRO (maintenance, repair, operation) goods, and indirect goods Owned by one company seeking to serve many customers Revenue model: Sales of goods Example: Grainger

B2B Models: E-procurement
Creates digital markets where participants transact for indirect goods B2B service providers, SaaS and PaaS providers Scale economies: efficiencies that arise from increasing the size of a business Revenue model: Service fees, supply-chain management, fulfillment services Example: Ariba

B2B Models: Exchanges Independently owned vertical digital marketplace for direct inputs Revenue model: Transaction, commission fees Create powerful competition between suppliers Tend to force suppliers into powerful price competition; number of exchanges has dropped dramatically

B2B Models: Industry Consortia
Industry-owned vertical digital marketplace open to select suppliers More successful than exchanges Sponsored by powerful industry players Strengthen traditional purchasing behavior Revenue model: Transaction, commission fees Example: SupplyOn

Private Industrial Networks
Digital network used to coordinate among firms engaged in business together Typically evolve out of large company’s internal enterprise system Key, trusted, long-term suppliers invited to network Example: Walmart’s network for suppliers

How E-commerce Changes Business
Industry Structures: refers to the nature of the players in an industry and their relative bargaining power. E-commerce changes industry structure by changing: Rivalry among existing competitors Barriers to entry Threat of new substitute products Strength of suppliers Bargaining power of buyers Industry structural analysis

How E-commerce Changes Business
E-commerce has many impacts on industry structure and competitive conditions. From the perspective of a single firm, these changes can have negative or positive implications depending on the situation. In some cases, an entire industry can be disrupted, while at the same time, a new industry is born. Individual firms can either prosper or be devastated.

Industry Value Chains Set of activities performed by suppliers, manufacturers, transporters, distributors, and retailers that transform raw inputs into final products and services Internet reduces cost of information and other transactional costs Leads to greater operational efficiencies, lowering cost, prices, adding value for customers

Figure 2.4: E-commerce and Industry Value Chains
Figure 2.4, Page 88. Every industry can be characterized by a set of value-adding activities performed by a variety of actors. E-commerce potentially affects the capabilities of each player as well as the overall operational efficiency of the industry.

Firm Value Chains Activities that a firm engages in to create final products from raw inputs Each step adds value Effect of Internet: Increases operational efficiency Enables product differentiation Enables precise coordination of steps in chain

Figure 2.5: E-commerce and Firm Value Chains
Figure 2.5, page 89. Every firm can be characterized by a set of value-adding primary and secondary activities performed by a variety of actors in the firm. A simple firm value chain performs five primary value-adding steps: inbound logistics, operations, outbound logistics, sales and marketing, and after-sales service. Every firm can be characterized by a set of value-adding primary and secondary activities performed by a variety of actors in the firm. A simple firm value chain performs five primary value-adding steps: inbound logistics, operations, outbound logistics, sales and marketing, and after sales service.

Firm Value Webs Networked business ecosystem
Uses Internet technology to coordinate the value chains of business partners Coordinates a firm’s suppliers with its own production needs using an Internet-based supply chain management system

Figure 2.6: Internet-enabled Value Web
Figure 2.6, page 90. Internet technology enables firms to create an enhanced value web in cooperation with their strategic alliance and partner firms, customers, and direct and indirect suppliers. Internet technology enables firms to create an enhanced value web in cooperation with their strategic alliance and partner firms, customers, and direct and indirect suppliers.

Business Strategy Plan for achieving superior long-term returns on capital invested: that is, profit Five generic strategies Product/service differentiation Cost competition Scope Focus/market niche Customer intimacy

E-commerce Technology and Business Model Disruption
Disruptive technologies Digital disruption Sustaining technology Stages Disruptors introduce new products of lower quality Disruptors improve products New products become superior to existing products Incumbent companies lose market share

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